Project financing is the process of determining how to go about obtaining the resources required to manage the costs associated with the launch and ongoing operation of a project. While this process sometimes involves the reallocation of resources in order to fund the project, project financing more commonly involves securing loans or other types of financing in order to cover the costs of the project. The goal is often to secure enough assets to launch the project and keep it functioning until it can begin to generate a return and become self-sufficient.
One approach to project financing is to make use of assets that are readily available. For example, a company that wishes to launch a new product line may choose to divert resources from other areas of the existing operation in order to fund the production of that product, as well as the marketing campaign required to attract the attention of consumers. This model can be effective, as long as this diversion of resources does not place the rest of the company in financial distress. If the anticipation is that profits from the project will be used to replace those funds within a given period of time, and the project fails to produce sufficient revenue, there is a real chance that the rest of the operation will suffer.
Another approach to project financing involves the creation of a bond issue. With this model, the goal is to attract outside investors who are willing to provide the financing necessary for the project, in return for earning a modest return. A bond issue may be structured to mature anywhere from a couple of years to thirty years or more. Over the life of the bond, the issuer may pay investors some interest as part of the return, or structure the bond so that both the principle and the interest is paid in full at the end of the bond’s life. This type of project financing normally carries less risk for the rest of the operation, since the assets already in use for other purposes remain unaffected by the progress of the new project.
A final common form of project financing is to obtain a loan that will provide enough resources to carry the project until it can mature to the point of producing revenue. With this model, the business may establish a line of credit for the project, repaying any funds borrowed from that credit in accordance with the terms that govern the financing. This approach can call for a minimum use of resources owned by the company in order to settle the line of credit during the early stages of the project. As the project begins to generate revenue, those proceeds can be used to repay any amount borrowed. Once the full amount of the financing is repaid, the successfully launched project can begin to show a profit and thus enhance the overall financial well being of the business.
